Economic policies under Franco’s dictatorship

The Spanish economy has three well-differentiated stages during Francisco Franco’s dictatorship. The first stage (1939-1950) was defined by the economic independence or autarky imposed by Franco’s government. After the Civil War, Spain emerged devastated and with alarming economic problems. Most of Spain’s economic reserves (gold and foreign exchange) practically disappeared; and given the reduced productive capacity faced by industrial and agricultural sectors, the government adopted anti-market policies seeking to transform Spain into self-sufficiency. These policies had a devastating impact in the Spanish economy driving a weak economic recovery, high inflation rates, a severe contraction of international trade as well as the development of black markets. By the end of the 1940’s Spanish GDP was barely 40% of the average West European countries.

The second stage (1950-1960) is mainly characterized by the government impetus for economic liberalization. In the early 1950’s some of the autarky policies were relaxed and a slow and cautious liberalization process started allowing the system to reach Pre-Civil War industrial levels by the early 1950’s although agricultural levels remain low until 1968. The international context dominated by the Cold War played a decisive role in the recovery of the Spanish economy. In 1953 Spain signed the Pact of Madrid with the United States. The treaty allowed the establishment of US military bases in Spanish soil in return of economic assistance for the remainder of the decade. The years from 1951 to 1956 saw great economic growth, however, lack of consistency in the implementation of policies drove the economy into stagnation; inflation resumed and foreign currency reserves went from a high of $58 MM USD in 1958 to $6 MM USD by mid-1959. The crisis led to the creation of a new and refreshed technocratic cabinet made up by bankers, industrial executives, academics as well as members from the Opus Dei. The group had had the task of implementing reforms that could break the economic impasse and lead the recovery. As part of this effort Spain joined different economic world organizations such as the Organization for European Economic Co-operation (OEEC), which later became the Organization for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), and the World Bank, groups that almost immediately became involved in supporting Spain economic liberalization.

The third and final stage (1960-1974), also known as the “Spanish Miracle”, is defined by economic growth. In June of 1959, following the advice and the support from the IMF and the OEEC, Spain released its Stabilization Plan. The plan had the following objectives:

Reduce inflation through the implementation of monetary and fiscal policy rigor. Public spending was controlled and the issuance of new public debt was limited.

Domestic markets were partly liberalized by eliminating bureaucratic regulations and simplifying administrative procedures.

The liberalization of international trade as well as the inclusion of the Peseta into the Bretton Woods system, combined with policies that encourage foreign direct investment.

The plan was successfully implemented and brought Spain one of the greatest periods of industrialization and prosperity.

Liberalization of the Spanish Economy (Pre and Post Franco)

Pre Franco era Spain (1931 – 1936) was caught in a spiral of violence, political instability and the slow recovery from the Great Depression. Three different governments ruled during the Second Spanish Republic, failing to execute numerous reforms and instigating many strikes. During the Spanish Civil War (1936 – 1939) the country divided into two centralized economies, and the focus was redirected to the war industry.

Branded an international outcast for its pro-Axis bias during World War II, General Franco’s authoritarian regime (1939 – 1975) sought to provide for Spain’s welfare by implementing a policy of economic self-sufficiency. From the economic point of view, the Franco dictatorship comprised two clearly different periods. The first fifteen years saw economic stagnation and only a slow recovery, while the following twenty years saw rapid economic growth, intense industrialization, and profound social change.

Franco’s death in 1975 and Spain’s return to democracy coincided with the steep decline in the industrial sector, high rates of inflation, unemployment and negative investment. Spain imported 70% of its energy (mostly in the form of the Middle Eastern Oil) and its insufficiency of energy was one of the explanatory elements in the lateness of Spain’s industrialization. Explosive quadrupling of oil prices had an extremely serious effect on the economy. In late 1982, the inflation was running at an annual rate of 16%, the external current account was US$4 billion in arrears, public spending was large, and foreign exchange reserves had become dangerously depleted. The Socialist government proposed the adoption of an economic policy strategy which was to follow two lines of action. The first aimed at correcting fundamental internal and external economic disequilibria. The second line of action would reform domestic economic institutions so as to facilitate the implementation of economic adjustment processes and improve the functioning of markets. This strategy was referred to as “sanitation and reform”. The government succeeded in reducing the rate of inflation by maintaining a restrictive monetary policy and by restraining the rate of growth of salaries and wages. However, a restrictive monetary policy coupled with a continuously rising public deficit made for rising interest rates which restricted the pace of economic recovery. Nevertheless, the recuperation of the world economy helped the Spanish government to restore equilibrium to its external accounts and by the end of 1985, there were indications that the Spanish economy was finally recovering from a crisis that had lasted for eleven years.

In spite of the stock exchange crises in late 1987, Spain’s economic growth was stronger than the average growth in the developed countries. Unfortunately, early 1990s characterize the return of economic crisis. The time period of 1987 – 1996 was represented by further reforms: cuts to the pension system, educational budget decreases (from almost 9% in 1991 to approximately 5% by 1996) and a 1994 health reform resulting in shortage of hospital beds. In early 1993, the Spanish Socialist Workers Party declared that minimum wages would fall by almost 5 percent in real terms from the year before and sought almost full deregulation of the labor market. Employment destruction during the period affected the male sector, concentrated in the agriculture and industry. There are 3 main structural problems that the Spanish economy currently faces, despite recent liberalizing and modernizing efforts: illegal immigration, high unemployment and terrorism.

Spain’s Accession and Integration into the EU

Spain officially became a member of (what would eventually become) the European Union (EU) on January 1, 1986. The road to accession, though, began more than two decades earlier, while the country was still under the reign of General Franco. Though the government adopted some liberalization policies in the 1960s, the Spanish economy remained structurally weak, with high levels of government intervention in the industrial sector (e.g. steel, shipbuilding) and large-scale unemployment (particularly in the agriculture sector). In 1962, Spain sought to negotiate an association agreement with European Economic Community (EEC), established four years earlier by the Treaty of Rome, as the basis for full integration into the Community. However, its application was rejected outright because Spain did not recognize the principles for membership: the rule of law, democracy and respect for human rights and liberties. It was not until July 1978 – two years after Franco’s death and one month after its first democratic elections – that the Spanish government applied for full membership in the EEC.

Spain’s pursuit of membership in the European Union (EU) was strongly influenced by political motives, namely to help consolidate its nascent democratic institutions. But accession to the EU would also compel the country to finally make major changes to its economic system. During the negotiation period (1978-1986), the government undertook policies increasing economic flexibility, industrial restructuring, and trade liberalization. Once Spain officially joined the Community in January 1986, it was required to make even more changes to align its legislation on industrial, agricultural, economic and financial policies with those of the EU and adopt its acquis communautaire, which included the custom union, VAT, Common Agriculture and Fisheries Policies (CAP & CFP), and external trade agreements. In the subsequent years, further integration would necessitate adherence to policies related to the Single Market and the European Monetary Union (EMU).

The modernization of the Spanish economy that occurred in connection with its integration into the EU was expected to spur growth and trade, but not without some adjustment costs. As Spain opened its borders, it was anticipated that certain sectors would benefit from increased trade with its EU neighbors, while less efficient industries would not. Other EU members (particularly France and Italy) feared that cheaper agricultural products from Spain would flood the market and reduce the value of their exports. In order to mitigate these effects, Spain was granted a seven-year transition period in order to adapt its tariff regime on EC imports, while transitional adjustments to the CAP and CFP were put into place so as to allay the anxieties of existing EU countries. Spain also benefited from EU financial assistance programs such as the European Regional Development Fund, and the Social and Cohesion Funds. These funds, instruments designed by the European Union to develop social and cohesion policy, have contributed significantly to reduce regional disparities and foster convergence within the EU.

The aforementioned economic reforms were adopted by the Spanish government in an attempt to bring measures of economic performance and welfare in line with those of the EU average. In 1980, Spain’s GDP per capita was 74.2% of EU average; by 1990, it had grown to 77.8% and reached 81.0% in 2000. Foreign direct investment (FDI) has also increased rapidly. From 1985 to 1995 Spain attracted more than 12% of total FDI inflows in the EU. EU integration also helped Spain to improve its nominal financial and economic measures to levels acceptable for admission to the EMU. From 1993 to 1997 long-term interest rates fell from 10.2% to 6.4%; inflation fell from 4.6% to 1.9%; and public sector deficit (as % of GDP) dropped to 2.6% from 6.9%.

Internationalization of Trade and Industry

Spain’s historic and modern economic landscape have shaped its trade and industry internationalization. Foreign Direct Investment inward flows positively influenced Spain’s economy since the mid-nineteenth century. Overall, foreign companies have dominated Spanish big business. Not until the 1960s and 1970s did Spain witness transformational industrialization, which coupled with its entry into the EU in 1986, paved the way for significant expansion.

Today, Spain’s trade accounts for over half of its GDP. However, Spain’s balance of trade has persistently yielded a trade deficit. OPEC imports reflect Spain’s reliance on petroleum. This dependency coupled with Spain’s decreased market competitiveness has adversely impacted the deficit. Additionally, Spanish exports have declined with the rise of the Euro. In 2009, the CIA reported Spain’s trade deficit at $77.5 billion. Despite significant growth in trade during the 1980s, imports continue to dominate the Spanish economy.

The majority of Spain’s international trade partners are from the EU region. A breakdown of Spain’s largest import and export partners is illustrated in Figure 1. The nation’s key export commodities include motor vehicles, food products, medicines, machinery and pharmaceuticals. In 2009, Spain’s net earnings amounted to $215.7, a $70.2 billion decline from 2008. Spain’s 2009 imports were reportedly $293.2 billion, a $415.5 billion decline from 2008. The nation’s lack of resources, particularly oil, of which Spain imports 1.813 million barrels per day.

In 2008, the common weighted average tariff rate amongst the EU nations including Spain was 1.3%. Areas in which Spanish trade policy incorporate non-tariff barriers include: Subsidies and quotas, import restrictions on certain shipments and market access restriction in certain service sectors.

While Spain’s service sector contributes 70% to the nation’s total production, Spain’s industry sectors account for less than one third of the nation’s GDP. The nation’s industrial centers are predominantly based in Madrid, Valladolid, Catalonia, Valencia and Asturias. As noted above Spain’s economy encompasses a variety of industry sectors including textile, food-processing, machinery, iron and steel. Leading the sectors however are the automotive and tourism industries.

Spain’s automotive industry accounted for 3.5% of the 2009 national GDP and employs approximately 9% of the total labor force. While Spain remains one of the top ten automobile manufacturers worldwide, the two-year period from 2008 to 2009 presented unfavorable government policies, which negatively impacted the industry’s production. Furthermore, several manufacturers passed brands to foreign firms. SEAT, a subsidiary of the Volkswagen Group is the predominant domestic automotive company in Spain.

The Spanish tourism industry ranks second in the world and is the nation’s primary income driver. It accounts for 11% of Spain’s GDP and employs about 2 million of the total work force. Spain’s tourism industry is also a key driver for exports. The global economic crisis and increased competition caused the industry to plateau in 2008.

Fertilizers and chemicals have emerged as principal industry sectors in Spain. The industry’s 2008 revenues were valued at $4.3 billion. Furthermore, the Spanish specialty chemicals market reported 2008 earnings of $24.2 billion.

Finally, Spain’s biotechnology industry has evolved through a steady increase in research and development investments. From 1998 to 2003, the biotechnology industry boomed, growing 350%. Today it employs more than 150,000 workers.

Ever since Spain joined the European Committee / European Union in 1986, Spanish trade with other EU states became increasingly visible, thereby aligning with the EC’s Single European Act of 1986. Privatization coupled with cultural and historic ties spurred Spain’s investment in Latin America throughout the 1990s.

A reflection of Spain’s economic progress over the last 50 years reveals a shift from exports of agricultural products and minerals to consumer goods and imports of industrial goods to machinery and equipment, fuels, chemicals and semi-finished goods demonstrates how significantly the dynamic has changed.

The Gathering Storm

The root of Spain’s recent economic success and current economic turmoil is the same: home and commercial real estate construction. From 2000-2008 the Spanish economy grew at a rate of approximately 3.3%, and much of the growth came from construction projects financed by international investors. However, in 2007 the housing bubble in Spain collapsed, ushering in an error of unprecedented financial turmoil for the country, dubbed La Crisis by pundits. The collapse of the housing bubble was exacerbated by the global recession which began in 2008. Following its last year of growth in 2008, Spain did not enjoy a quarter with positive economic growth until the third quarter of 2010, and growth for that period was a meager 0.2%, the first quarterly growth rate in two years.

As the Spanish economy faltered and La Crisis took hold, Spain’s banks and secretively-operated cajas began to struggle with loan defaults and began to accumulate housing stock with continued to depress the Spanish real estate market. Beginning in 2009, the Bank of Spain was forced to step in to rescue banks as the size of their cash reserves dwindled and the risk of bank failure increased. In order to shore up the banking industry, the central bank created the FROB, Fondo de Reestructuración Ordenada Bancaria, a €9bn rescue fund which can be leveraged to nearly €100bn. Using both the FROB and its power to control struggling banks, the Bank of Spain has attempted to stabilize Spain’s banking sector. However, the root of the trouble for the banking sector is its exposure to Spain’s depressed real estate market. There are approximately one million empty or unfinished homes available in Spain coupled with a glut of available commercial real estate. Experts estimate that Spain’s real estate surplus may last until at least 2015.

In order for the Spanish real estate market, and in turn the Spanish banking industry, to recover, the overall Spanish economy must begin to grow again. Unfortunately, the Spanish economy has faltered along with the banking and real estate industries. From a twenty-year low unemployment rate of 7.9% in the summer of 2007, the Spanish unemployment rate has skyrocketed. The unemployment climbed past 15% in January 2009, and finally peaked at more than 20% in the summer of 2010. In the third quarter of 2010, Spain’s unemployment rate declined slightly to 19.79%, marking only the second quarter since 2007 where Spain’s economy added jobs. Among Spain’s youngest workers, those under 25 years of age, a remarkable 42.5% of eligible workers are unemployed.

Throughout the crisis, the Spanish government has taken extraordinary steps to put Spaniards back to work. From 2009, the government began “Plan E” an ambitious public works program designed to create temporary jobs for the unemployed through road construction and related projects. However, as the unrelenting unemployment rate climb indicates, the job creation scheme was largely unsuccessful in stemming the tide and resulted primarily in creating budget deficit of more than €100bn. As the global economic crisis continued, international pressure from the World Bank and elsewhere mounted on Spain’s Prime Minister, José Luis Rodríguez Zapatero, to slow the growth of the budget deficit. In June of 2010, Prime Minister Zapatero obliged the World Bank and implemented a very unpopular austerity program. The austerity program featured a reduction in severance, relaxed private employment protections, and a 5% cut in the salary of civil servants, a group which had historically been immune to job and salary reductions. The austerity program also included a 2% increase in the VAT, a €6bn in public works spending, and a freeze on government pensions.

The introduction of the austerity measures was a significant step for the Prime Minister, who had long been an ally of Spain’s socialists and labor unions. However, with such severe new economic restrictions, the risk for political unrest in Spain is at a new high. Throughout the European economic crisis, we have seen repeated examples of civil unrest in response to government cutbacks. From the severe public strikes in Greece and France, to the lower-key protests in Great Britain, there is a clear pattern of general strikes in response to austerity programs. However, the response so far in Spain has been muted. A general strike in September had little impact on the nation and did not attract the same international attention as other European general strikes. While Spain has thus far avoided severe unrest, the key to long-term stability lies in returning the country to economic prosperity.

Spain’s growth rate for 2011-2013 is forecast at a modest 1% per year, and while growth in the third quarter was higher for the first time in two years, the austerity program still threatens the country’s fragile recovery. The country must make a slow and painful transition from an economy driven by unsustainable construction growth to a more modern services based economy. Over the past two quarters the nation has shown signs that it is slowly making the transition as consumer spending has increased and confidence levels have improved. However, as the austerity programs continue to constrain the economy, most forecasts for the fourth quarter suggest that consumer spending will decline again and that Spain’s overall economy will show contraction for the year. The future of Spain’s economy relies on the nation finding ways to balance its need to reduce government spending while simultaneously encouraging workers and businesses to transform into a flexible service-based workforce.

SOURCES

http://en.wikipedia.org/wiki/Economic_history_of_Spain

http://www.nationsencyclopedia.com/economies/Europe/Spain-OVERVIEW-OF-ECONOMY.html#ixzz12rTkY9NC

Tortella, Gabriel. The Development of Modern Spain. Harvard University Press, 2000.

Lieberman, Sima. Growth and Crisis in the Spanish Economy: 1940-93. Routledge London and New York, 1995.

Scobie, H.M. The Spanish Economy in the 1990s. Routledge London and New York, 1998

http://en.wikipedia.org/wiki/Economic_history_of_Spain

Stabilisation and growth under dictatorships: Lessons from Franco’s Spain – Leandro Prados de la Escosura Joan R. Rosés Isabel Sanz Villarroya

La economía española durante el franquismo – Jose Luis Garcia Delgado

Appendix 1: GDP per capita (1960 – 2010)